What every expat needs to know about ‘tax’ before returning to or retiring in Australia

What taxation changes apply on becoming an Australian tax resident?

On becoming an Australian tax resident, you become subject to income tax (up to 45 per cent plus 2 per cent Medicare Levy) and capital gains tax (CGT) on your worldwide income and assets. As at the day of your return, you’ll need to value each of your assets, including foreign currency holdings, as that value becomes your cost base for assessment of capital gain when you subsequently sell (or otherwise dispose of) that asset. Taxable Australian property (residential and commercial property as well as some business interests) does not need to be revalued nor do assets (such as shares) that you held at the time and on which you elected not to pay CGT when you departed Australia.

Importantly, on resuming Australian tax residency, you become eligible again for the CGT discount on assets held for more than one year. Many expats still don’t realise that since 8 May 2012, you have to include 100 per cent of a gain on taxable Australian property, and you only get to discount this gain to 50 per cent for the period before 8 May 2012 and after your resumption of tax residency.

One benefit of resuming Australian tax residency is that you access the tax-free threshold on employment and investment income up to $18,200, then 19 per cent to $37,000, and 32.5 per cent to $90,000 (compared with the flat non-resident rate of 32.5 per cent to $90,000).

Should I buy a house to live in before or after I return to Australia?

The game has changed in Australia over recent years in relation to buying a house. As a non-resident there is now:

• Additional stamp duty on purchase in most states;
• Additional land tax in most states;
• An annual vacancy fee if your property is vacant more than six months a year; Increasingly tight bank lending rules; and
• No CGT discount on sale, in proportion to the period of non-resident ownership.

All things being equal, you might avoid the above complications and wait to buy your home until you return to Australia. But if you find your dream home (or site) in a great location at a fair price, then at least be aware of the above and seek professional assistance to plan ahead and minimise taxes. Careful planning is also required to manage debt structure and taxation for investment property.

How do I use Australian superannuation to reduce taxation and build an asset for retirement?

A superannuation account-based pension is one of the few tax-free assets you can have in Australia. Before you retire, and while you are an expat, you can potentially save Australian income tax by making tax-deductible contributions to superannuation of up to $25,000 p.a. and also add up to $100,000 p.a. as a capital contribution each year up to a balance limit of $1.6 million (or $3.2 million for a couple). The annual contribution limits mean that as an expat, you should consider whether to start your superannuation contribution strategy well before you return to Australia so that your capital may be sheltered in the tax-free environment when you retire.

Depending on your employment overseas, you may have a company or government retirement plan (provident funds in Asia, 401k or the like in the US, or a pension fund in the UK or Europe, for example). Alternatively, you may have set up a personal retirement fund. Certain foreign schemes (but not all) are recognised by the Australian Taxation Office (ATO) as foreign superannuation funds.

If your retirement scheme is recognised by the ATO as a foreign superannuation fund, then you can generally transfer benefits to an Australian fund subject to the non-concessional cap of $100,000 p.a. (or $300,000 at one time using the bring forward rule) and any restrictions of your foreign fund and any foreign tax that may apply.
A word of caution; if your retirement scheme is not recognised by the ATO as a foreign superannuation fund, then there can potentially be harsh tax implications on any withdrawals you make from the fund while a tax resident of Australia.should

How do I integrate insurances and estate planning into my re-entry plan?

After many years outside Australia, you may now have too little or too much life insurance and are perhaps paying unnecessary premiums embedded in old superannuation accounts. In reviewing your insurance, you should consider the insurance options available to you and also new insurance products in Australia. Your estate plan should take account of insurance proceeds and superannuation, which are not assets necessarily covered by your will.

How do I manage currency, both before and after I return to Australia?

Broadly, the two most important currency considerations for an Aussie planning to come back to Australia are:

1. Managing currency around the timing of your repatriation; and
2. Understanding and managing Australian taxation on foreign currency gains.

Your decision to repatriate to Australia may be planned for some time, but your currency strategy is focused around the time of the actual move. Consequently, there can be a significant currency timing risk. For example, if you are planning to bring back the equivalent of $2.0 million AUD, a 5 per cent appreciation of the AUD in the months before you transfer to AUD would lead to a loss of $100,000. Over longer time periods, currency moves can seriously affect an expat’s financial success.

The other key factor is that increases in the value of foreign currency is taxable for an Australian tax resident. Currency holdings must be valued at the date of resuming Australian tax residency and realised gains thereafter (that is the sale of currency at a higher price) are classified as capital gains for the purposes of Australian taxation. If you made that gain within a year of resuming tax residency then it is a non-discount gain; greater than a year, and 50 per cent of the gain is taxable.

What can you do to reduce the risk of unfavourable currency movements and tax on favourable currency movements eroding your wealth? There are a number of possible solutions, including:

• as a non-resident, start building a portfolio of AUD assets before repatriation and/or hedge using forward currency contracts with a bank or currency broker.
• as a tax resident, once capital has been repatriated to Australia, resume international asset positions and/or currency positions in tax-effective structures.

The above ‘questions and answers’ are a brief summary of some of the financial issues in repatriating to Australia. If you have a question in relation to the themes discussed in this article or would like to arrange a time for a quick call, please email us at [email protected]

Disclaimer: Any advice included in this article is general and has been prepared without taking into account your objectives, financial situation or needs. As such, you should consider its appropriateness having regard to these factors and where appropriate obtain financial advice. Any tax information refers to current laws, is not based on your unique circumstances and should not be relied on as tax advice. Before you make any decision about whether to acquire a certain financial product, you should obtain and read the relevant product disclosure statement.